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Blog Coverage Deere Gets A Rating from Fitch

LONDON, UK / ACCESSWIRE / October 31, 2016 / Active Wall St. blog coverage looks at the headline from Deere & Co. (NYSE: DE). Fitch Ratings has assigned ‘A’/’F1’ Long- and Short-Term Issuer Default Ratings (IDRs) to Deere & Company (NYSE:DE). The Rating outlook remained stable. Register with us now for your free membership and blog access at: http://www.activewallst.com/register/.

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Key Drivers

Fitch expects that Deere would be able to maintain a strong financial profile over the long-term despite near-term weakness in its agricultural and construction equipment markets, which are resulting in higher leverage and reduced free cash flow (FCF) for the company. The rating agency is expecting that Deere would be able to reduce discretionary spending such as share repurchases and take necessary actions to reduce its cost structure to support margins at lower sales volumes. Fitch also expects that credit metrics will recover when the current cycle reverses.

Fitch stated that the current downturn in Deere’s agricultural equipment market is following a cycle with the peak coming in 2013 and that the current decline is the most severe since 1979-1986, as measured by the cumulative decline in industry sales and the length of the downturn. Fitch noted that demand could begin to stabilize sometime in 2017; however the timing of a meaningful recovery is uncertain and could be delayed by low crop prices, net cash farm income which could decline for a fourth consecutive year in 2016, weak farmer sentiment, and high levels of used equipment. Deere’s results have also been hampered by low energy prices which reduce demand for construction equipment.

Credit Metrics to Come Under Pressure

Fitch expects Deere Equipment’s leverage and other credit metrics to remain weak compared to mid-cycle levels until demand improves. As of July 31, 2016, Deere’s Debt/EBITDA was 2x and Fitch estimates that it could increase to approximately 2.3x in the near- to mid-term before the company’s end markets improve. By comparison, Deere had debt/EBITDA ratio of 1.1x at the end of 2013.

As of at July 31, 2016 Deere had EBITDA margins of 7.7% on a latest 12 months (LTM) basis, approximately half of the peak level of 14.3% in 2013. Margins are expected to improve in FY17 as Deere implements cost reductions which could help the company save at least $500 million annually by the end of 2018. FCF at Deere Equipment, including dividends received from financial services, has declined significantly due to weaker operating results but remains positive. Fitch expects FCF after corporate dividends to be around $500 million in 2016 compared to $1.5 billion in 2015.

Fitch expects Deere’s capital expenditures and dividends to remain relatively stable until conditions improve and the company can rebuild its operating performance. The rating agency noted that cash deployment for share repurchases has been much lower in 2016 following several years of high spending that was largely funded by strong FCF.

Fitch calculates an appropriate debt/equity ratio of 6x at Financial Services based on solid asset quality, sufficient liquidity, and strong funding profile. Deere’s actual debt/equity as measured by Fitch, including intangible assets, was 7.7x as of July 31, 2016. As a result, an equity injection of approximately $1.1 billion would be needed to reduce Financial Services leverage to 6x. Fitch assumes Deere could reclassify as equity a portion of intercompany receivables due from Financial Services that totalled $2.4 billion as of July 31, 2016. As a result, it would not be necessary for Deere to issue debt to fund the equity injection.

Key Assumptions

While providing the rating for Deere equipment, Fitch has assumed that Deere’s revenue will decline approximately 10% in 2016, that the industry downturn in agricultural equipment will approach a cyclical trough in 2017. The rating agency expects Deere’s EBITDA margins to drop by more than half on an aggregate basis between the industry peak in 2013 and the end of 2016, but will begin to recover in 2017 and that the FCF will decline to approximately $500 million in 2016 including dividends from Financial Services. Fitch expects share repurchases to be reduced in 2016 to much lower levels compared to more than $2 billion in each of the past two years.

Stock Performance

On Friday, the stock closed the trading session at $87.17, slightly climbing 0.20% from its previous closing price of $87.00. A total volume of 2.48 million shares have exchanged hands. Deere’s stock price advanced 3.95% in the last month, 13.02% in the past three months, and 4.95% in the previous six months. Furthermore, since the start of the year, shares of the company have gained 16.86%. The stock is trading at a PE ratio of 17.45 and has an annualized dividend yield of 2.75%.

Earnings Alert:Deere will announce its Q4 FY16 earnings results on November 23rd, 2016.

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SOURCE: Active Wall Street

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